þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the quarterly period ended September
30, 2014

OR

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the transition period from __________
to ____________

Commission File No. 000-53285

IVEDA SOLUTIONS, INC.

(Exact name of registrant as specified in
its charter)

Nevada

20-2222203

(State or other jurisdiction of incorporation or

(I.R.S. Employer

organization)

Identification No.)

1201 South Alma School Road, Suite 8500, Mesa,

85210

Arizona

(Zip Code)

(Address of principal executive offices)

Registrant’s telephone number, including
area code: (480) 307-8700

Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes x
No ¨

Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter
period that the registrant was required to submit and post such files).

Yes
x No ¨

Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.

Large
accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨

Smaller
reporting company x

Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨
No x

Preferred Stock, $0.00001 par value; 100,000,000 shares authorized; no shares outstanding as of September 30, 2014 and December 31, 2013

-

-

Common Stock, $0.00001 par value; 200,000,000 shares authorized; 27,308,357 and 26,722,012 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively

273

267

Additional Paid-In Capital

23,088,833

22,354,002

Accumulated Comprehensive Loss

(36,127

)

(30,670

)

Less Notes Receivable from Stockholder

(504,000

)

-

Accumulated Deficit

(25,997,497

)

(21,801,790

)

Total Stockholders' Equity (Deficit)

(3,448,518

)

521,809

Total Liabilities and Stockholders' Equity (Deficit)

$

3,820,647

$

3,679,246

See accompanying Notes to Condensed
Consolidated Financial Statements

3

IVEDA SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2014 AND 2013

Three Months

Three Months

Nine Months

Nine Months

Ended

Ended

Ended

Ended

Sept. 30, 2014

Sept. 30, 2013

Sept. 30, 2014

Sept. 30, 2013

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

REVENUE

Equipment Sales

$

305,489

$

409,222

$

707,505

$

1,467,044

Service Revenue

162,966

149,578

465,604

476,410

Other Revenue

20,554

10,118

42,026

34,852

TOTAL REVENUE

489,009

568,918

1,215,135

1,978,306

COST OF REVENUE

397,173

471,992

921,574

1,667,665

GROSS PROFIT

91,836

96,926

293,561

310,641

OPERATING EXPENSES

1,220,132

1,645,563

4,278,944

4,531,718

LOSS FROM OPERATIONS

(1,128,296

)

(1,548,637

)

(3,985,383

)

(4,221,077

)

OTHER INCOME (EXPENSE)

Foreign Currency Gain (Loss)

1,226

(8,611

)

11,935

(9,718

)

Gain (Loss) on Derivatives and Debt Conversion

59,443

-

101,444

(44,000

)

Interest Income

6,365

-

8,242

997

Interest Expense

(140,075

)

(16,221

)

(316,028

)

(65,611

)

Total Other Income (Expense)

(73,041

)

(24,832

)

(194,407

)

(118,332

)

LOSS BEFORE INCOME TAXES

(1,201,337

)

(1,573,469

)

(4,179,790

)

(4,339,409

)

BENEFIT (PROVISION) FOR INCOME TAXES

(38

)

-

(15,917

)

-

NET LOSS

$

(1,201,375

)

$

(1,573,469

)

$

(4,195,707

)

$

(4,339,409

)

BASIC AND DILUTED LOSS PER SHARE

$

(0.04

)

$

(0.06

)

$

(0.16

)

$

(0.18

)

See accompanying Notes to Condensed
Consolidated Financial Statements

4

IVEDA SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE (LOSS)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2014 AND 2013

Three Months

Three Months

Nine Months

Nine Months

Ended

Ended

Ended

Ended

Sept. 30, 2014

Sept. 30, 2013

Sept. 30, 2014

Sept. 30, 2013

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Net Loss

$

(1,201,375

)

$

(1,573,469

)

$

(4,195,707

)

$

(4,339,409

)

Other Comprehensive loss:

Foreign currency translation adjustment

(5,490

)

1,022

(5,457

)

(7,757

)

Comprehensive Loss

$

(1,206,865

)

$

(1,572,447

)

$

(4,201,164

)

$

(4,347,166

)

See accompanying Notes to Condensed
Consolidated Financial Statements

5

IVEDA SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2014 AND 2013

Nine Months

Nine Months

Ended

Ended

Sept. 30, 2014

Sept. 30, 2013

(Unaudited)

(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

Net Loss

$

(4,195,707

)

$

(4,339,409

)

Adjustments to Reconcile Net Loss to Net Cash Used by Operating Activities

Depreciation and Amortization

165,248

169,164

Amortization of Debt Discount

24,946

-

Amortization of Deferred Financing Costs

54,830

-

(Gain) Loss on Derivatives and Debt Conversion

(101,444

)

44,000

Stock Compensation

242,000

126,813

Common Stock and Warrants Issued for Services

1,285

222,206

Allowance for Doubtful Accounts

4,699

-

(Increase) Decrease in Operating Assets:

Accounts Receivable

35,706

1,410,678

Inventory

(108,424

)

(86,424

)

Other Current Assets

(259,517

)

56,312

Accounts Payable and Other Current Liabilities

(94,203

)

(438,889

)

Net cash used in operating activities

(4,230,581

)

(2,835,549

)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of Property and Equipment

(245,437

)

(89,897

)

Proceeds from Sale of Equipment

1,292

-

Net cash used in investing activities

(244,145

)

(89,897

)

CASH FLOWS FROM FINANCING ACTIVITIES

Changes in Restricted Cash

5,287

(441,724

)

Proceeds from (Payments on) Short-Term Notes Payable/Debt

922,627

(586,514

)

Proceeds from Short-Term Debt, Related Party

330,000

-

Proceeds from Exercise of Stock Options

8,636

244,574

Proceeds from (Payments to) Related Parties

88,000

(236,605

)

Proceeds from Long-Term Debt, Net of Payments

2,960,663

-

Payments on Capital Lease Obligations

(2,536

)

(6,987

)

Deferred Finance Costs (Net)

(98,978

)

-

Common Stock Issued, net of (Cost of Capital)

(21,084

)

4,913,216

Net cash provided by financing activities

4,192,615

3,885,960

EFFECT OF EXCHANGE RATE CHANGES ON CASH

(1,918

)

7,377

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

(284,029

)

967,891

Cash and Cash Equivalents- Beginning of Period

559,729

114,462

CASH AND CASH EQUIVALENTS - END OF PERIOD

$

275,700

$

1,082,353

See accompanying Notes to Condensed
Consolidated Financial Statements

6

IVEDA SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS - CONTINUED

FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2014 AND 2013

Nine Months

Nine Months

Ended

Ended

September 30, 2014

September 30, 2013

(Unaudited)

(Unaudited)

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Interest Paid

$

31,456

$

49,390

SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Discount on Convertible Debt

$

113,474

$

-

Establishment of Derivative Liability

$

126,904

$

-

Common Stock Warrants Issued as Deferred Finance Costs

$

13,430

$

-

Accrued Interest rolled into Convertible Debentures

$

78,860

$

-

See accompanying Notes to Condensed
Consolidated Financial Statements

7

IVEDA SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2014 AND 2013

NOTE 1

BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These statements should be read
in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2013. Certain information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted.
The operating results and cash flows for the nine-month period ended September 30, 2014, are not necessarily indicative of the
results that will be achieved for the full fiscal year ending December 31, 2014 or for future periods.

The accompanying condensed consolidated
financial statements have been prepared without audit and reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary for a fair statement of financial position and the results of operations for
the interim periods. Preparing financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, and expenses. Estimates are used for, but not limited to, the accounting for the allowance
for doubtful accounts, impairment costs, depreciation and amortization, sales returns and discounts, warranty costs, uncertain
tax positions and the recoverability of deferred tax assets, stock compensation, contingencies and the fair value of assets and
liabilities disclosed. Actual results and outcomes may differ from management’s estimates and assumptions. The statements
have been prepared in accordance with GAAP and pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance
with GAAP, have been condensed or omitted pursuant to such SEC rules and regulations.

The balance sheet at December
31, 2013 has been derived from the audited financial statements at that date but does not include all of the information and footnotes
required by GAAP for complete financial statements.

Consolidation

Effective April 30, 2011, Iveda
Solutions, Inc. (the “Company”) completed its acquisition of Sole Vision Technologies (dba “MegaSys”),
a company based in Taiwan. The consolidated financial statements include the accounts of the Company and MegaSys (from May 1, 2011
through September 30, 2012). All intercompany balances and transactions have been eliminated in consolidation.

Going Concern

The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and
the liquidation of liabilities in the normal course of business. The Company’s Audit Report on the Financial Statements for
the year ended December 31, 2013 contained a going concern qualification. Since inception, the Company has generated an accumulated
deficit from operations of approximately $25.9 million at September 30, 2014 and has used approximately $4.2 million in cash to
fund operations through the nine months ended September 30, 2014. As a result, a significant risk exists regarding our ability
to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amounts and classification of liabilities that might result from this uncertainty.

A multi-step plan was adopted
by management to enable the Company to continue to operate and begin to report operating profits. The highlights of that plan are:

·

In September 2014, the Company engaged
an investment banker to assist in evaluating potential equity financing opportunities in the near term.

·

As approved by the Board of Directors
in December 2013 the Company raised approximately $3.6 million through the private placement of convertible debentures and warrants
through June 27, 2014 and will continue efforts of this nature throughout the remainder of the fiscal year as deemed necessary.

·

The Board of Directors approved a plan
for the Company to engage a financial advisor in connection with a potential capital raise of up to $30 million (“Long Term
Financing”).

8

IVEDA SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2014 AND 2013

NOTE 1

BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

·

The Company is actively installing its
cloud based software platform with certain telecommunications companies in other countries to create a reoccurring licensing revenue
model as well as a distribution channel for proprietary video camera hardware in each respective country.

·

The Company intends to continue to participate
in industry and vertical tradeshows to launch new products, generate leads, solicit resellers and other sales channels, and identify
potential technology partners.

·

In December 2013, Iveda hired Bob Brilon
as our Chief Financial Officer and Executive Vice President of Business Development. He has strong ties with the investment community
and has extensive experience in mergers and acquisitions, strategic growth planning, and interacting with domestic and foreign
institutional investors, which will be instrumental to our market expansion, global distribution of our cloud video hosting platform
and services, and raising capital to fund our growth. In February 2014, the board of Directors appointed Mr. Brilon as the Company’s
President.

Concentrations

Financial instruments, which
potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and trade accounts
receivable.

Substantially all cash is deposited
in two financial institutions, one in the United States and one in Taiwan. At times, amounts on deposit in the United States may
be in excess of the FDIC insurance limit. Deposits in Taiwan financial institutions are insured by CDIC (Central Deposit Insurance
Corporation) with maximum coverage of NTD 3 million. At times, amounts on deposit in Taiwan may be in excess of the CDIC insurance
limit.

Accounts receivable are unsecured,
and the Company is at risk to the extent such amount becomes uncollectible. The Company performs periodic credit evaluations of
its customers’ financial condition and generally does not require collateral. US based segment revenue from two customers
represented approximately 41% of total revenues for the nine months ended September 30, 2014, and two customers represented approximately
92% of total accounts receivable at September 30, 2014. Taiwan based segment revenue from three customers represented approximately
67% of total revenues for the nine months ended September 30, 2014, and three customers represented approximately 64% of total
accounts receivable at September 30, 2014.

Intangible
Assets

Intangible assets consist of
trademarks and other intangible assets associated with the purchase price allocation of MegaSys. Such assets are being amortized
over their estimated useful lives ranging from six months to ten years. Other Intangible Assets are fully amortized as of September
30, 2014. Future amortization of Intangible Assets is as follows:

Trademarks

2014

$

5,000

2015

20,000

2016

20,000

2017

20,000

Thereafter

66,666

Total

$

131,666

Fair Value of Financial
Instruments

Fair value estimates discussed
herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2014. The
respective carrying values of certain on-balance-sheet financial instruments approximate their fair values. These financial instruments
include cash, accounts receivable, accounts payable, accrued expenses, convertible notes and amounts due to related parties. Fair
values were assumed to approximate carrying values for these financial instruments because they are short term in nature and their
carrying amounts approximate fair values or they are receivable or payable on demand.

9

IVEDA SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2014 AND 2013

NOTE 1

BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Derivative Liabilities

The Convertible Debentures include
both a conversion option and detachable warrants that are being accounted for as derivative liabilities because of anti-dilution
provisions, which under US GAAP, prevents them from being indexed to the Company’s stock triggering derivative accounting.
The fair value of the conversion option and detachable warrants is carried on the face of the accompanying balance sheet as a Derivative
Liability, in current liabilities because the underlying instruments are convertible by the holder at any time until maturity.
Any change in fair value of the derivative liability is reported as a gain or loss on derivative liability in the accompanying
statement of operations.

Segment Information

The Company conducts operations
in various geographic regions outside the United States. The operations and the customer base conducted in the foreign countries
are similar to the United States operations. The net revenues and net assets (liabilities) for other significant geographic regions
outside the United States are as follows:

Net Revenues

Net Assets (Liabilities)

US Revenue

$

470,792

$

(3,349,278

)

Asia (all of MegaSys)

$

423,224

$

(99,240

)

Philippines

$

163,059

Mexico

$

158,061

Furthermore, due to operations
in various geographic locations, the Company is susceptible to changes in national, regional and local economic conditions, demographic
trends, consumer confidence in the economy and discretionary spending priorities that may have a material adverse effect on the
Company’s future operations and results.

The Company is required to collect
certain taxes and fees from customers on behalf of government agencies and remit these back to the applicable governmental agencies
on a periodic basis. These taxes and fees are legal assessments to the customer, for which the Company has a legal obligation to
act as a collection agent. Because the Company does not retain these taxes and fees, the Company does not include such amounts
in revenue. The Company records a liability when the amounts are collected and relieves the liability when payments are made to
the applicable governmental agencies.

The Company operates as two
reportable business segments in defined in ASC 280, "Segment Reporting." Each business segment has a chief operating
decision maker and management personnel which review their business segment’s performance as it relates to revenue, operating
profit and operating expenses.

10

IVEDA SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2014 AND 2013

NOTE 1

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued

Three Months

Three Months

Condensed

Ended Sept. 30, 2014

Ended Sept. 30, 2014

Consolidated

Iveda Solutions, Inc.

MegaSys

Total

Revenue

$

270,142

$

218,867

$

489,009

Cost of Revenue

254,417

142,756

397,173

Gross Profit

15,725

76,111

91,836

Depreciation and Amortization

51,320

2,235

53,555

General and Administrative

1,025,477

141,100

1,166,577

(Loss) from Operations

(1,061,072

)

(67,224

)

(1,128,296

)

Foreign Currency Gain (Loss)

1,226

-

1,226

Gain on Derivatives

59,443

-

59,443

Interest Income

6,352

13

6,365

Interest Expense

(126,959

)

(13,116

)

(140,075

)

(Loss) Before Income Taxes

(1,121,010

)

(80,327

)

(1,201,337

)

(Provision) for Income Taxes

-

(38

)

(38

)

Net Loss

$

(1,121,010

)

$

(80,365

)

$

(1,201,375

)

Nine Months

Nine Months

Condensed

Ended Sept. 30, 2014

Ended Sept. 30, 2014

Consolidated

Iveda Solutions, Inc.

MegaSys

Total

Revenue

$

791,911

$

423,224

$

1,215,135

Cost of Revenue

728,605

192,969

921,574

Gross Profit

63,306

230,255

293,561

Depreciation and Amortization

154,267

10,981

165,248

General and Administrative

3,765,486

348,210

4,113,696

(Loss) from Operations

(3,856,447

)

(128,936

)

(3,985,383

)

Foreign Currency Gain (Loss)

11,935

-

11,935

Gain on Derivatives

101,444

-

101,444

Interest Income

7,127

1,115

8,242

Interest Expense

(295,166

)

(20,862

)

(316,028

)

(Loss) Before Income Taxes

(4,031,107

)

(148,683

)

(4,179,790

)

(Provision) for Income Taxes

-

(15,917

)

(15,917

)

Net Loss

$

(4,031,107

)

$

(164,600

)

$

(4,195,707

)

Revenues as shown below represent
sales to external customers for each segment. Additions to long-lived assets as presented in the following table represent capital
expenditures. Inventories, property and equipment for operating segments are regularly reviewed by management and are therefore
provided below.

11

IVEDA SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2014 AND 2013

NOTE 1

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued

Three Months Ended

Nine Months Ended

September 30,

September 30,

2014

2013

2014

2013

Revenues

United States

$

270,142

$

203,943

$

791,911

$

574,179

Republic of China (Taiwan)

218,867

364,975

423,224

1,404,127

$

489,009

$

568,918

$

1,215,135

$

1,978,306

Three Months Ended

Nine Months Ended

September 30,

September 30,

2014

2013

2014

2013

Operating earnings (loss)

United States

$

(1,061,072

)

$

(1,433,885

)

$

(3,856,447

)

$

(3,910,673

)

Republic of China (Taiwan)

(67,224

)

(114,752

)

(128,936

)

(310,404

)

$

(1,128,296

)

$

(1,548,637

)

$

(3,985,383

)

$

(4,221,077

)

Nine Months Ended

September 30,

2014

2013

Property and equipment, net

United States

$

543,580

$

438,686

Republic of China (Taiwan)

20,966

12,525

$

564,546

$

451,211

Nine Months Ended

September 30,

2014

2013

Additions to (Disposals of) long-lived assets

United States

$

245,437

$

86,868

Republic of China (Taiwan)

-

(1,660

)

$

245,437

$

85,208

12

IVEDA SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER
30, 2014 AND 2013

NOTE 1

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued

Nine Months Ended

September 30,

2014

2013

Inventory

United States

$

318,560

$

51,955

Republic of China (Taiwan)

119,109

156,178

$

437,669

$

208,133

Nine Months Ended

September 30,

2014

2013

Total Assets

United States

$

1,583,716

$

2,467,126

Republic of China (Taiwan)

2,236,931

2,154,036

$

3,820,647

$

4,621,162

Reclassification

Certain amounts in 2013 may
have been reclassified to conform to the 2014 presentation.

New Accounting Pronouncements

In March 2014 FASB issued Accounting
Standards Update (ASU) No. 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements.
The guidance addresses the consolidation of lessors in certain common control leasing arrangements and is based on a consensus
reached by the Private Company Council (PCC).

Under current U.S. GAAP, a company
is required to consolidate an entity in which it has a controlling financial interest. The assessment of controlling financial
interest is performed under either: (a) a voting interest model; or (b) a variable interest entity model. In a variable
interest entity model, the company has a controlling financial interest when it has: (a) the power to direct the activities
that most significantly affect the economic performance of the entity; and (b) the obligation to absorb losses or the right
to receive benefits of the entity that could be potentially significant to the entity.

To determine which model applies,
a company preparing financial statements must first determine whether it has a variable interest in the entity being evaluated
for consolidation and whether that entity is a variable interest entity.

The new guidance allows a private
company to elect (when certain conditions exist) not to apply the variable interest entity guidance to a lessor under common control.
Instead, the private company would make certain disclosures about the lessor and the leasing arrangement.

Under the amendments in this
ASU, a private company lessee could elect an alternative not to apply variable interest entity guidance to a lessor when:

13

IVEDA SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2014 AND 2013

NOTE 1

BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

·

The private company lessee and the lessor
are under common control;

·

The private company lessee has a leasing
arrangement with the lessor;

·

Substantially all of the activity between
the private company lessee and the lessor is related to the leasing activities (including supporting leasing activities) between
those two companies, and

·

If the private company lessee explicitly
guarantees or provides collateral for any obligation of the lessor related to the asset leased by the private company, then the
principal amount of the obligation at inception does not exceed the value of the asset leased by the private company from the lessor.

·

If elected, the accounting alternative
should be applied to all leasing arrangements meeting the above conditions. The alternative should be applied retrospectively to
all periods presented, and is effective for annual periods beginning after December 15, 2014, and interim periods within annual
periods beginning after December 15, 2015. Early application is permitted for all financial statements that have not yet been made
available for issuance.

In April 2014 FASB issued ASU
No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued
Operations and Disclosures of Disposals of Components of an Entity. The amendments in the ASU change the criteria for reporting
discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application
related to financial reporting of discontinued operations guidance in U.S. GAAP.

Under the new guidance, only
disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should
have a major effect on the organization’s operations and financial results. Examples include a disposal of a major geographic
area, a major line of business, or a major equity method investment.

In addition, the new guidance
requires expanded disclosures about discontinued operations that will provide financial statement users with more information about
the assets, liabilities, income, and expenses of discontinued operations.

The new guidance also requires
disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for
discontinued operations reporting. This disclosure will provide users with information about the ongoing trends in a reporting
organization’s results from continuing operations.

The amendments in this ASU enhance
convergence between U.S. GAAP and International Financial Reporting Standards (IFRS). Part of the new definition of discontinued
operation is based on elements of the definition of discontinued operations in IFRS 5, Non-Current Assets Held for Sale and
Discontinued Operations.

The amendments in the ASU are
effective in the first quarter of 2015 for public organizations with calendar year ends. For most nonpublic organizations, it is
effective for annual financial statements with fiscal years beginning on or after December 15, 2014. Early adoption is permitted.

14

IVEDA SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2014 AND 2013

NOTE 2

SHORT-TERM
DEBT

The short term debt balances were as follows:

September 30,

December 31,

2014

2013

Loan from Shanghai Commercial & Savings Bank at various interest rates ranging from 1% per annum to 3.2%. Due November 2014.

$

120,534

$

60,291

Loan from Shanghai Bank at 3.24% interest rate per annum. Due at January 2, 2015.

162,111

-

Loan from Hua Nan Bank at 3.26% interest rate per annum. Due March 2015.

328,400

-

Loan from SinoPac Bank at 3.26% interest rate per annum. Due January - February, 2015.

328,400

-

Loan from unrelated individual. Due October 31, 2014.

32,840

-

Balance at end of period

$

972,285

$

60,291

NOTE 3

CONVERTIBLE
DEBENTURES

From December 12, 2013 through
June 30, 2014, the Company sold $3,600,000 in principal amount of three year debentures, convertible at any time into Company common
stock at $1.50 per share (subject to certain anti-dilution adjustments as described below). The debentures bear interest at a rate
of 9.5% per annum accruing monthly with the first interest payment due after six months and then monthly unless at the option of
the Company the interest is added to the principal amount. As of September 30, 2014, $78,860 of related interest has been rolled
into principal. Purchasers of the convertible debentures also received warrants to purchase an aggregate of 327,273 shares of Company
common stock exercisable for five years at an exercise price of $1.65 (subject to certain anti-dilution adjustments as described
below). The Company incurred financing costs in connection with the issuance of the convertible debentures of $260,635 paid in
cash and issued warrants to purchase 199,243 shares of common stock; these deferred costs have been capitalized in the accompanying
balance sheets, and are being amortized to interest expense using the effective interest method over the 3 year life of the debt
and 5 year life of the warrants. The fair value of the conversion option and warrants on the date issued to the debenture holders
totaled $141,082, is discounted from the carrying value of the debenture and amortized into interest expense over the 3 year life
of the debt and 5 year life of the warrants using the effective interest method. At September 30, 2014, the carrying value of the
convertible debentures totaled $3,563,184, net of the $115,676 debt discount. Accrued interest related to the convertible debentures
totaled $107,360 (excluding $78,860 rolled into principal). The Company expects to amortize approximately $100,000 into interest
expense in fiscal 2015 and 2016, reducing to $65,000 in 2017, $48,000 in 2018 and $4,000 in 2019 reducing the related deferred
costs and debt discount. Principal and all accrued interest is due at maturity, but can be repaid at any time with no penalty.

The fair value of the conversion
option and warrants is carried on the face of the accompanying Balance Sheet as derivative liability and totaled $65,264 at September
30, 2014. Any change in fair value of the derivative liability is reported as a gain or loss on derivative liability in the accompanying
statement of operations. The Company recognized a gain on the derivative of $59,443and $101,444 respectively, during the three
months and nine months ended September 30, 2014.

Both the debentures and the
warrants described above contain anti-dilution provisions, which provide that in the event that the Company issues additional equity
securities, other than certain excluded issuances, the conversion price and exercise price of the debentures and warrants, respectively,
will be reduced to equal the effective price at which the additional equity securities were deemed issued. Such effective price
will be calculated as the quotient obtained by dividing the total number of additional equity securities by the consideration received
by the Company for such issuance.

15

IVEDA SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2014 AND 2013

In addition, purchasers of the
debentures and warrants described above were granted certain piggy-back registration rights with respect to the shares of common
stock issuable upon conversion of the debentures and exercise of the warrants, in the event that the company effects a registration
of its common stock under the under the Securities Act of 1933, as amended (“Securities Act”). In the event of a registered
offering of the Company’s common stock solely for cash, purchasers of the debentures and warrants may be entitled to include
for registration all of the shares of common stock issuable upon conversion of the debentures and exercise of the warrants. In
the event of a registered offering involving an underwriting of the Company’s common stock, purchasers of the debentures
and warrants may be entitled to include for registration a portion of the shares of common stock issuable upon conversion of the
debentures and exercise of the warrants, such portion not to be reduced below 20 percent of the total number of securities to be
included in any such registration, divided proportionally among the purchasers of the debentures and warrants.

NOTE 4

EQUITY

Preferred Stock

The Company is authorized to
issue 100,000,000 shares of $0.00001 par value preferred stock. No shares have been issued, and the rights and privileges of this
class of stock have not been defined.

Common Stock

During the nine months ended
September 30, 2014, the Company issued 586,345 shares of common stock upon the exercise of options and warrants to purchase common
stock.

Notes Receivable from
Stockholder

In June 2014, an advisor and
shareholder of the Company exercised warrants to purchase 200,000 and 300,000 shares of common stock, granted at an exercise price
of $1.02 and $1.00 per share, respectively, in exchange for 5% Promissory Notes totaling $504,000 due June 30, 2015.

NOTE 5

STOCK
OPTION PLAN AND WARRANTS

The Company has also granted
non-qualified stock options to employees and contractors. All non-qualified options are generally issued with an exercise price
equal to the closing price of the common stock on the date of the grant. Options may be exercised up to ten years following the
date of the grant, with vesting schedules determined by the Company upon grant. Vesting periods range from 100% fully vested upon
grant to a range of four to five years. Vested options may be exercised up to three months following date of termination of the
relationship. The fair values of options are determined using the Black-Scholes option-pricing model. The estimated fair value
of options is recognized as an expense on the straight-line basis over the options’ vesting periods.

Stock option transactions during
the nine months ended September 30, 2014 were as follows:

16

IVEDA SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2014 AND 2013

Nine months ended September 30, 2014

Shares

Weighted- Average Exercise Price

Outstanding at Beginning of Year

5,693,322

$

1.07

Granted

357,000

1.65

Exercised

(56,345

)

0.10

Forfeited or Canceled

(380,250

)

1.23

Outstanding at End of Period

5,613,727

1.10

Options Exercisable at Period-End

5,197,290

$

1.19

Weighted-Average Fair Value of Options Granted During the Period

$

0.41

Information with respect to
stock options outstanding and exercisable as of September 30, 2014 is as follows:

Options Outstanding

Options Exercisable

Range of Exericse Prices

Number Outstanding at Sept. 30, 2014

Weighted- Average Remaining Contractual Life

Weighted- Average Exercise Price

Number Exercisable at September 30, 2014

Weighted- Average Exercise Price

$0.10 - $1.80

5,613,727

7.5

$

1.10

5,197,290

$

1.19

The fair value of each option
granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions
used for options granted.

2014

Expected Life

6.25 yrs

Dividend Yield

0

%

Expected Volatility

20.75

%

Risk-Free Interest Rate

2.64

%

Expected volatility for 2014
was estimated by using the Dow Jones U.S. Industry indexes sector classification methodology for industries similar to the Company.
The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at
the grant date. The expected life of the options is based on management’s estimate using historical experience.

During the nine months ended
September 30, 2014, the grant activity included 345,153 warrants related to the convertible debentures sold during the same period
(See Note 3). Warrants included in the sale of the convertible debentures may be exercised up to 4 or 5 years following the date
of grants with an exercise price of $1.65.

During the nine months ended
September 30, 2014, the Company issued a warrant as compensation to a consultant to purchase 20,000 shares of its common stock
at an exercise price of $1.65 per share. The warrant became fully vested at the time of issuance and expires three years from the
date of issuance. Using the Black Scholes pricing model, the warrant was valued at $1,285. As a result, the Company recorded non-cash
compensation expense of $1,285.

17

IVEDA SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2014 AND 2013

Stock warrant transactions during
the nine months ended September 30, 2014 were as follows:

Outstanding at Beginning of Year

3,883,641

Granted

365,153

Exercised

(530,000

)

Forfeited or Canceled

(50,000

)

Warrants Redeemable at September 30, 2014

3,668,794

NOTE 6

RELATED
PARTY TRANSACTIONS

On September 10, 2014, the Company
entered into a debenture agreement with Mr. Alex Kuo, a member of the Board of Directors of the Company, for $30,000, at 9.5% interest
per annum with interest and principal payable March 10, 2015.

On September 8, 2014, the Company
entered into a debenture agreement with Mr. Kuo for $100,000, at 9.5% interest per annum with interest and principal payable March
8, 2015.

On August 28, 2014, the Company
entered into a debenture agreement with Mr. Gregory Omi, a member of the Board of Directors of the Company, for $200,000, at 9.5%
interest per annum with interest and principal payable February 25, 2015.

On May 27, 2014, Mr. Kuo purchased
a 9.5% Senior Convertible Debenture (the “Debenture”) in the principal amount of $38,000. The Debenture is due and
payable three years after the date of issuance and the principal and unpaid interest thereunder is convertible into shares of the
Company’s common stock at the election of the holder any time prior to the maturity date at a conversion price equal to $1.50
per share, subject to adjustment upon the occurrence of certain events as provided in the Debenture. In connection with the purchase
of the Debenture, Mr. Kuo received a warrant to purchase 3,455 shares of the common stock. The warrant has a term of five years
from date of issuance and the exercise price of $1.65 per share is subject to adjustment upon the occurrence of certain events
as provided in the warrant. Accordingly, the Company recognized a discount of $408 on the principal value of $38,000, which discount
is being amortized over the three year term of the debenture, and a discount of $270 with respect to the warrant, which discount
is being amortized over the five year term of the warrant.

On March 4, 2014, Mr. Brilon,
the Company’s President and Chief Financial Officer, purchased a Debenture in the principal amount of $50,000. The Debenture
is due and payable three years after the date of issuance and the principal and unpaid interest thereunder is convertible into
shares of the Company’s common stock at the election of the holder at any time prior to the maturity date at a conversion
price equal to $1.50 per share, subject to adjustment upon the occurrence of certain events as provided in the Debenture. In connection
with the purchase of the Debenture, Mr. Brilon received a warrant to purchase 4,545 shares of the common stock. The warrant has
a term of five years from date of issuance and the exercise price of $1.65 per share is subject to adjustment upon the occurrence
of certain events as provided in the warrant. Accordingly, the Company recognized a discount of $335on the principal value of $50,000,
which discount is being amortized over the three year term of the debenture, and a discount of $325with respect to the warrant,
which discount is being amortized over the five year term of the warrant.

On December 20, 2013, Mr. Brilon
purchased a Debenture in the principal amount of $75,000. The Debenture is due and payable three years after the date of issuance
and the principal and unpaid interest thereunder is convertible into shares of the Company’s common stock at the election
of the holder any time prior to the maturity date at a conversion price equal to $1.50 per share, subject to adjustment upon the
occurrence of certain events as provided in the Debenture. In connection with the purchase of the Debenture, Mr. Brilon received
a warrant to purchase 6,818 shares of the common stock. The warrant has a term of five years from date of issuance and the exercise
price of $1.65 per share is subject to adjustment upon the occurrence of certain events as provided in the warrant. Accordingly,
the Company recognized a discount of $394 on the principal value of $75,000, which discount is being amortized over the three year
term of the debenture, and a discount of $436 with respect to the warrant, which discount is being amortized over the five year
term of the warrant.

On November 19, 2012, the Company
entered into a convertible debenture agreement with Mr. Robert Gillen, member of the Board of Directors of the Company, for $100,000.
Under the original terms of the agreement, Interest is payable at 10% per annum, payable on the extended maturity date of December
19, 2014. The Company issued warrants to purchase 10,000 shares of the Company Stock, at an exercise price of $ 1.10. The debenture
is convertible into shares of Company common stock on or before the Maturity Date, at a conversion rate of $1.10 per share. On
June 20, 2013, interest of $5,000 was paid on the debenture.

18

IVEDA SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2014 AND 2013

NOTE 7

EARNINGS
(LOSS) PER SHARE

The following table provides
a reconciliation of the numerators and denominators reflected in the basic and diluted earnings per share computations.

Basic EPS is computed by dividing
reported earnings available to stockholders by the weighted average shares outstanding. The Company had net losses for the three
months and nine months ended September 30, 2014 and 2013, and the effect of including dilutive securities in the earnings per common
share would have been anti-dilutive. Accordingly, all options and warrants to purchase common shares (totaling 9,282,521 potential
shares at September 30, 2014) and shares potentially issuable upon conversion of the convertible debenture (totaling 2,452,573
as of September 30, 2014) were excluded from the calculation of diluted earnings per share for the three months and nine months
ended September 30, 2014 and 2013.

Three Months

Three Months

Nine Months

Nine Months

Ending

Ending

Ending

Ending

Basic EPS

Sept. 30, 2014

Sept. 30, 2013

Sept. 30, 2014

Sept. 30, 2013

Net Loss

$

(1,201,375

)

$

(1,573,469

)

$

(4,195,707

)

$

(4,339,409

)

Weighted Average Shares

27,308,357

25,700,296

26,968,884

24,181,281

Basic and Diluted Loss Per Share

$

(0.04

)

$

(0.06

)

$

(0.16

)

$

(0.18

)

NOTE 8

SUBSEQUENT
EVENTS

On October 14, 2014, the Company entered
into a debenture agreement with Mr. Joseph Farnsworth, a member of the Board of Directors of the Company, for $35,000, at 9.5%
interest per annum with interest and principal payable April 14, 2015.

On October 1, 2014, the Company
entered a debenture agreement with an unrelated party for $100,000, at 9.5% interest per annum, with interest and principal due
March 31, 2015.

On October 1, 2014, the Company
entered a debenture agreement with an unrelated party for $100,000, at 9.5% interest per annum, with interest and principal due
November 30, 2014.

The company has announced
three separate projects in Taiwan totaling $3.7 million over the next twelve months.

The Company has evaluated subsequent
events from the balance sheet date through the date the financial statements were issued and determined that there are no additional
items to disclose.

19

ITEM 2.

MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion
should be read in conjunction with the Company’s unaudited financial statements and associated notes appearing elsewhere
in this Form 10-Q.

Note Regarding Forward-Looking Information

This Quarterly Report
on Form 10-Q, including the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
contains forward-looking statements, which involve risks and uncertainties, including statements regarding our capital needs, business
strategy, and expectations. For a discussion of certain risks related to the statements, please see Part I, “Item IA, Risk
Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Any statements contained
herein that are not statements of historical fact may be deemed to be forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as “may,” “should,” “will,” “expect,”
“plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,”
“potential,” “forecast,” “project” or “continue,” the negative of such terms or
other comparable terminology.

You should not rely
on forward-looking statements as predictions of future events or results. Any or all of our forward-looking statements may turn
out to be wrong. They can be affected by inaccurate assumptions, risks and uncertainties, and other factors, which could cause
actual events or results to be materially different from those expressed or implied in the forward-looking statements. These factors
may cause our actual results to differ materially from any forward-looking statement. In addition, new factors emerge from time
to time and it is not possible for us to predict all factors that may cause actual results to differ materially from those contained
in any forward-looking statements. We disclaim any obligation to publicly update any forward-looking statements to reflect events
or circumstances after the date of this report, except as required by applicable law.

Except as otherwise
indicated by the context, references in this Quarterly Report on Form 10-Q to “we,” “our,” “us,”
“Iveda,” and “the Company” refer to the business of Iveda Solutions, Inc.

Critical Accounting
Policies and Estimates

Management’s
Discussion and Analysis of Financial Conditions and Results of Operations is based upon our financial statements, which have been
prepared in accordance with GAAP. The preparation of these financial statements requires the Company’s management to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe
to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
A description of our critical accounting policies and related judgments and estimates that affect the preparation of our financial
statements is set forth in Item 7, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations,”
of our Annual Report on Form 10-K for the year ended December 31, 2013. Such policies are unchanged.

Overview

Iveda Solutions, Inc.
began operations on January 24, 2005, under the name IntelaSight, Inc., a Washington corporation doing business as Iveda Solutions
(“IntelaSight”). On October 15, 2009, IntelaSight became a wholly-owned operating subsidiary of Iveda Corporation (formerly
known as Charmed Homes, Inc.), a Nevada corporation, through a merger. All Company operations were conducted through IntelaSight
until December 31, 2010, at which time IntelaSight merged with and into Iveda Corporation, and changed its name to Iveda Solutions,
Inc. On April 30, 2011, the Company completed its acquisition of Sole-Vision Technologies, Inc. (doing business as MegaSys), a
corporation organized under the laws of the Republic of China (Taiwan) (“MegaSys”). As of April 30, 2011, MegaSys became
a wholly owned subsidiary of the Company.

Iveda is an established
and innovative company, delivering secure, open source and enterprise class managed video services by leveraging the power of cloud
computing. The Company’s robust enterprise class video hosting architecture, utilizing data centers, allows scalability,
flexibility, and centralized video management, access, and storage, without the burden of buying and maintaining software and equipment.
Iveda’s customers simply log in online, access their cameras and begin watching live and/or recorded video data from anywhere
in the world at any time using any Internet-enabled device.

Iveda developed Sentir,
a revolutionary Software as a Service video management platform, which enables companies such as telecommunications, cable, internet,
data centers, and other communication companies with subscribers already paying for monthly services, to offer cloud video surveillance
services for additional recurring monthly revenue.

20

The Company began
selling and installing video surveillance equipment, primarily for security purposes and secondarily for operational efficiencies
and marketing, and provides video hosting in-vehicle streaming video, archiving, and real-time remote surveillance services with
a proprietary reporting system, DSR™ (Daily Surveillance Report), to a variety of businesses and organizations. By consolidating
computer power into a single location at the server level, the Company creates efficiencies due to economies of scale leveraging
cloud computing, which offers more features and flexibility compared to traditional box systems. The Company has a SAFETY Act Designation
by the Department of Homeland Security as an anti-terrorism technology provider. The Company’s current principal sources
of revenue are derived from our video hosting real-time surveillance and equipment sales and installation but anticipates licensing
its cloud based video platform will be more significant in the future.

MegaSys, our Taiwanese
subsidiary, specializes in deploying video surveillance systems for airports, commercial buildings, government customers, data
centers, shopping centers, hotels, banks, and Safe City initiatives in Taiwan and other neighboring countries. MegaSys integrates
security surveillance products, software and services to provide integrated security solutions to the end user. Most of MegaSys’s
revenues are derived from one-time sales, which differs from Iveda’s business model of on-going video hosting, remote video
storage, and real-time surveillance revenues. MegaSys does not own any proprietary technology or intellectual property other than
certain trademarks in Taiwan used in its business.

New Accounting Pronouncements

In March 2014 the
Financial Accounting Standards Board (FASB) issued ASU No. 2014-07, Applying Variable Interest Entities Guidance to Common Control
Leasing Arrangements. The guidance addresses the consolidation of lessors in certain common control leasing arrangements and
is based on a consensus reached by the Private Company Council (PCC).

Under current U.S.
GAAP, a company is required to consolidate an entity in which it has a controlling financial interest. The assessment of controlling
financial interest is performed under either: (a) a voting interest model; or (b) a variable interest entity model.
In a variable interest entity model, the company has a controlling financial interest when it has: (a) the power to direct
the activities that most significantly affect the economic performance of the entity; and (b) the obligation to absorb losses
or the right to receive benefits of the entity that could be potentially significant to the entity.

To determine which
model applies, a company preparing financial statements must first determine whether it has a variable interest in the entity being
evaluated for consolidation and whether that entity is a variable interest entity.

The new guidance allows
a private company to elect (when certain conditions exist) not to apply the variable interest entity guidance to a lessor under
common control. Instead, the private company would make certain disclosures about the lessor and the leasing arrangement.

Under the amendments
in this ASU, a private company lessee could elect an alternative not to apply variable interest entity guidance to a lessor when:

·

The private company lessee and the lessor
are under common control;

·

The private company lessee has a leasing
arrangement with the lessor;

·

Substantially all of the activity between
the private company lessee and the lessor is related to the leasing activities (including supporting leasing activities) between
those two companies, and

·

If the private company lessee explicitly guarantees or provides collateral for any obligation of the lessor related to the
asset leased by the private company, then the principal amount of the obligation at inception does not exceed the value of
the asset leased by the private company from the lessor.

If elected, the accounting
alternative should be applied to all leasing arrangements meeting the above conditions. The alternative should be applied retrospectively
to all periods presented, and is effective for annual periods beginning after December 15, 2014, and interim periods within annual
periods beginning after December 15, 2015. Early application is permitted for all financial statements that have not yet been made
available for issuance.

In April 2014, the
FASB issued Accounting Standards Update (ASU) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant,
and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments
in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses
sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP.

Under the new guidance, only disposals representing a strategic
shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s
operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major
equity method investment.

21

In addition, the new
guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information
about the assets, liabilities, income, and expenses of discontinued operations.

The new guidance also
requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify
for discontinued operations reporting. This disclosure will provide users with information about the ongoing trends in a reporting
organization’s results from continuing operations.

The amendments in
this ASU enhance convergence between U.S. GAAP and International Financial Reporting Standards (IFRS). Part of the new definition
of discontinued operation is based on elements of the definition of discontinued operations in IFRS 5, Non-Current Assets Held
for Sale and Discontinued Operations.

The amendments in
the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. For most nonpublic organizations,
it is effective for annual financial statements with fiscal years beginning on or after December 15, 2014. Early adoption is permitted.

The Company’s
management does not currently anticipate that the future application of either new accounting standard will have a material impact
on the Company’s financial statements.

Results of Operations

Revenue
We recorded revenue of $489,009 for the three months ended September 30, 2014, compared to $568,918 for the three months ended
September 30, 2013, a decrease of $79,909 or 14% In the three months ended September 30, 2014, our recurring service revenue was
$162,966 or 33% of revenue, and our equipment sales and installation revenue was $305,489 or 62% of revenue, compared to recurring
service revenue of $149,578 or 26% of revenue, and equipment sales and installation revenue of $409,222 or 72% of revenue for the
same period in 2013. Our U.S. operations saw an increase of $66,200 in revenues during the three months ended September 30, 2014,
while our MegaSys subsidiary saw revenues decrease by $146,109 during the quarter. This decrease was due to an anticipated decline
in large project-driven revenue from Taiwan.

We recorded revenue
of $1,215,135 for the nine months ended September 30, 2014, compared to $1,978,306 for the nine months ended September 30, 2013,
a decrease of $763,171 or 39%. In the nine months ended September 30, 2014, our recurring service revenue was $465,604 or 38% of
revenue, and our equipment sales and installation revenue was $707,505 or 58% of revenue, compared to recurring service revenue
of $476,410 or 24% of revenue, and equipment sales and installation revenue of $1,467,044 or 74% of revenue for the same period
in 2013. The decrease in revenue was due to an anticipated decline in large project revenues in Taiwan during the nine months ended
September 30, 2014.

Cost of Revenue
Total cost of revenue was $397,173 (81% of revenues; gross margin of 19%) for the three months ended September 30, 2014, compared
to $471,992 (83% of revenue; gross margin of 17%) for the three months ended September 30, 2013, a decrease of $74,819 or 16%.
The decrease of cost of revenue and increase of gross margin were primarily driven by a shift toward recurring revenue streams
and a decrease in reliance on equipment sales, which carried higher costs and lower margins.

Total cost of revenue
was $921,574 (76% of revenues; gross margin of 24%) for the nine months ended September 30, 2014, compared to $1,667,665 (84% of
revenues; gross margin of 16%) for the nine months ended September 30, 2013, a decrease of $746,091 or 45%. The decrease of cost
of revenue and increase of gross margin were primarily driven by a shift toward recurring revenue streams and a decrease in reliance
on equipment sales, which carried higher costs and lower margins.

Operating Expenses
Operating expenses were $1,220,132 for the three months ended September 30, 2014, compared to $1,645,563 for the three months ended
September 30, 2013, a decrease of $425,431 or 26%. The decrease in operating expenses was primarily related to a reduction in direct
sales costs, personnel, direct advertising, and financial consulting expenses.

Operating
expenses were $4,278,944 for the nine months ended September 30, 2014, compared to $4,531,718 for the nine months ended
September 30, 2013, a decrease of $252,774 or 6%. The decrease in operating expenses in 2014 over 2013 is due primarily to
decreased direct sales costs, personnel, direct advertising, financial consulting, and research and development expenses.

Loss from Operations
For the three months ended September 30, 2014, the loss from operations decreased to $1,128,296 compared to $1,548,637 for the
three months ended September 30, 2013, a decrease in loss of $420,341 or 27%. The decrease in loss from operations was primarily
due to the decrease in operating expenses.

22

For the nine months
ended September 30, 2014, the loss from operations decreased to $3,985,383 compared to $4,221,077 for the three months ended September
30, 2013, a decrease in loss of $235,694 or 6%. The decrease in loss from operations was primarily due to the decrease in operating
expenses.

Other Expense-Net
Other expense-net was $73,041 for the three months ended September 30, 2014, compared to $24,832 for the three months ended September
30, 2013, the increase of $48,209 or 194% was primarily related to interest accrued on the convertible debentures.

Other expense-net
was $194,407 for the nine months ended September 30, 2014, compared to $118,332 for the nine months ended September 30, 2013, an
increase of $76,075 or 64% primarily related to interest accrued on the convertible debentures.

Net Loss
The decrease of $372,094 or 24% in the net loss to $1,201,375 for the three months ended September 30, 2014, from $1,573,469 for
the three months ended September 30, 2013, was primarily due to decreased operating expenses.

The decrease of $143,702
or 3% in the net loss to $4,195,707 for the nine months ended September 30, 2014, from $4,339,409 for the nine months ended September30,
2013, was primarily the effect of reduced operating expenses.

Liquidity and Capital Resources

On September 30, 2014,
we had cash and cash equivalents of $275,700 including $243,028 in our domestic business and $32,672 in our foreign business. The
decrease in cash from $559,729 as of December 31, 2013 was primarily due to operating losses and advances to suppliers. There are
no legal or economic factors that materially impact our ability to transfer funds between our domestic and foreign businesses.

Net cash used in operating
activities during the nine months ended September 30, 2014, and for the nine months ended September 30, 2013, was $4,230,581 and
$2,835,549 respectively. Cash used in operating activities for those periods consisted primarily of the net loss from operations.

Net cash used in investing
activities for the nine months ended September 30, 2014, and the nine months ended September 30, 2013, was $244,145 and $89,897
respectively.

We have experienced
significant operating losses since our inception. At December 31, 2013, we had approximately $17 million in net operating loss
carry forwards available for federal and state income tax purposes. We did not recognize any benefit from these operating loss
carry forwards for the year ended 2013 or through the nine months ended September 30, 2014. Our operating loss carry forwards expire
starting in 2025 and continuing through 2032.

The Company has limited
liquidity and has not yet established a stabilized source of revenues sufficient to cover operating costs. At our current estimated
burn rate, the Company negative working capital of $978,473, which means our current liabilities exceed our current assets by that
amount. Accordingly, the Company must raise capital to continue as a going concern. The Company is exploring financing alternatives
for additional funding. During the quarter the Company entered into debenture agreements with certain members of the Board of Directors
of the Company (see Note 6). During the quarter, the Company engaged an investment banker to act as the Company’s financial
and capital markets advisor to seek to raise up to $30 million in long term financing. The Company’s continuation as a going
concern is dependent upon its ability to generate greater revenues through increased sales and/or its ability to raise additional
funds through the capital markets. No assurance can be given that the Company will be successful in these efforts. Even if funding
is available, the Company cannot assure investors that it will be available on terms that are favorable to the Company’s
existing shareholders. Additional funding may be accomplished through the issuance of equity or debt securities that could be significantly
dilutive to the percentage ownership of the Company’s existing shareholders. In addition, these newly issued securities may
have rights, preferences or privileges senior to those of existing shareholders. Accordingly, such a financing transaction could
materially and adversely impact the price of our common stock.

Our U.S. operation’s
revenue from two customers represented approximately 46% of total revenues for the three months ended September 30, 2014, and approximately
92% of total accounts receivable at September 30, 2014. No other customers represented greater than 10% of total revenues in the
three months ended September 30, 2014.

As of the three months
ended September 30, 2014, our U.S. operation has two new customer receivables aged over 120 days. The terms for payment for our
U.S. operations are generally “due upon receipt” or, for municipalities, due within 30 days. These customers have been
identified and an adequate allowance for doubtful accounts has been set up to offset the risk of uncollectibility.

23

Our Taiwan operation’s
revenue from three customers represented approximately 67% of total revenues for the three months ended September 30, 2014, and
represent approximately 64% of total accounts receivable at September 30, 2014. No other customers represented greater than 10%
of total revenues in the three months ended September 30, 2014.

Our Taiwan operations
have 92% of gross accounts receivables aged over 120 days as of September 30, 2014. The payment terms vary based on the timing
of the completion of customer projects. MegaSys generally does not control the time of payment because MegaSys’s product
is only one component of the larger project. In general, payment takes place within one year of commencing the project, except
that 5% of the total payment is retained and released one year after the completion of the project. Excluding such retained amounts,
MegaSys provides an allowance for doubtful accounts for any receivables that will not be paid within one year. Management has set
up a 57%, or $357,064, allowance for doubtful accounts as of the quarter ended September 30, 2014. Management deems the rest to
be collectible based on the nature of the customer contracts and past experience with similar customers.

Substantially all
cash is deposited in two financial institutions, one in the United States and one in Taiwan. At times, amounts on deposit in the
United States may be in excess of the FDIC insurance limit. Deposits in Taiwan financial institutions are insured by CDIC (Central
Deposit Insurance Corporation) with maximum coverage of NTD 3 million. At times, amounts on deposit in Taiwan may be in excess
of the CDIC insurance limit.

Off Balance
Sheet Arrangements During the reporting period, the Company had no off-balance sheet arrangements, as such term is defined
in Item 303(a)(4) of Regulation S-K.

ITEM 3.

QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As a smaller reporting
company, the Company is not required to provide Part I, Item 3 disclosures in this Quarterly Report.

ITEM 4.

CONTROLS
AND PROCEDURES.

Evaluation of Disclosure Controls and
Procedures

Under the supervision
and with the participation of our management, including our principal executive officer and principal financial officer, we conducted
an evaluation of the design and operation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2014. Based
on our evaluation, our principal executive officer and our principal financial officer concluded that the design and operation
of our disclosure controls and procedures were not effective as of September 30, 2014 due to limited direct oversight of operations
at our MegaSys subsidiary.

This control deficiency
could result in an audit adjustment or a misstatement of substantially all financial statement accounts that would result in a
material misstatement to the annual or interim consolidated financial statements and disclosures that would be not be prevented
or detected. As our resources allow, we plan to add financial personnel to enable us to properly provide accurate and timely financial
reporting at our MegaSys subsidiary.

Changes in Internal Control over Financial
Reporting

There have not been
any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting for our U.S. operations. We are in the process of evaluating our internal controls over financial
reporting for MegaSys.

Limitations on the Effectiveness of
Controls

Our management, including
our principal executive officer and principal financial officer, does not expect that our disclosure controls and internal controls
will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments
in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can
be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or Board override
of the control.

24

The design of any
system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because
of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Segregation of Duties

As of September 30,
2014, the Company had two employees knowledgeable in SEC accounting and reporting. Our management has put in place policies and
procedures designed, to the extent possible, to segregate the duties of initiating transactions, maintaining custody over assets,
and recording transactions. Due to our size and limited resources, segregation of all conflicting duties may not always be possible
and may not be economically feasible.

PART II. OTHER
INFORMATION

ITEM 1.

LEGAL
PROCEEDINGS.

None.

ITEM
1A.

RISK
FACTORS.

As a smaller reporting
company, the Company is not required to provide Part II, Item 1A disclosures in this Quarterly Report.

ITEM 2.

UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3.

DEFAULT
ON SENIOR SECURITIES.

None.

ITEM 4.

MINE
SAFETY DISCLOSURES.

None.

ITEM 5.

OTHER
INFORMATION.

None.

ITEM 6.

EXHIBITS.

Exhibit

Number

Description

2.1

Agreement and Plan of Merger, dated March 21, 2011, by and among Iveda Solutions, Inc., a Nevada corporation, Sole-Vision Technologies, Inc. (doing business as MegaSys), a corporation organized under the laws of the Republic of China, and the shareholders of MegaSys (Incorporated by reference to the Form 10-K/A filed on 2/9/2012).

3.1

Articles of Incorporation of Charmed Homes Inc. (Incorporated by reference to the Form SB-2 filed on 4/27/2007).

3.2

Bylaws of Iveda Solutions, Inc. (Incorporated by reference to the Form 10-K filed on 3/31/2014).

3.3

Amendment to Articles of Incorporation, filed with the Nevada Secretary of State on September 9, 2009 (Incorporated by reference to the Form 8-K filed on 10/2/2009).

3.4

Articles of Merger filed with the Secretary of State of Nevada
on December 28, 2010, and dated effective December 31,

2010 (Incorporated by reference to the Form 8-K filed January
4, 2010).

4.1

Specimen Stock Certificate (Incorporated by reference to Form SB-2 filed on 4/27/2007).

4.2

Form of Stock Option Agreement under the IntelaSight, Inc. 2008 Stock Option Plan (Incorporated by reference to Form S-4/A1 filed on 7/10/2009).

25

4.3

Form of Common Stock Purchase Warrant issued by IntelaSight, Inc. (Incorporated by reference to Form S-4/A1 filed on 7/10/2009).

Form of Common Stock Purchase Warrant issued by Iveda Corporation in conjunction with the Merger (Incorporated by reference to Form 8-K filed on 10/21/2009).

4.6

2010 Stock Option Plan, dated January 18, 2010 (Incorporated by reference to the Form S-8 filed on 2/4/2010).

4.7

Form of Notice of Grant of Stock Option under the Iveda Solutions, Inc. 2010 Stock Option Plan, as amended (Incorporated by reference to Form S-8 filed on 6/24/2011).

4.8

Form of Stock Option Agreement under the Iveda Solutions, Inc. 2010 Stock Option Plan, as amended (Incorporated by reference to Form S-8 filed on 6/24/2011).

4.9

Form of Stock Option Exercise Notice under the Iveda Solutions, Inc. 2010 Stock Option Plan, as amended (Incorporated by reference to Form S-8 filed on 6/24/2011).

10.1

Application Development Service Agreement dated July 14, 2006 by and between Axis Communications AB and IntelaSight, Inc. (Incorporated by reference to Form S-4/A2 filed on 8/5/2009).

10.2

Partner Agreement dated January 30, 2007 by and between Milestone Systems, Inc. and IntelaSight, Inc. (Incorporated by reference to the Form S-4/A1 filed on 7/10/2009).

10.3

Solution Partner Agreement dated March 13, 2008 by and between Milestone Systems A/S and IntelaSight, Inc. (Incorporated by reference to the Form S-4/A1 filed on 7/10/2009).

10.4

Channel Partner Program Membership Agreement — Gold Solution Partner Level — dated June 23, 2009 by and between Axis Communications Inc. and IntelaSight, Inc. (Incorporated by reference to the Form S-4/A1 filed on 7/10/2009).

10.5

Stock Purchase Agreement, dated October 15, 2009, by and among Iveda Corporation, IntelaSight, Inc., Ian Quinn and Kevin Liggins (Incorporated by reference to the Form 8-K filed on 10/21/2009).

10.6

Subscription Agreement, dated July 26, 2010 (Incorporated by reference to Form 10-Q filed on 11/12/2010).

10.7

Line of Credit Promissory Note, dated September 15, 2010 (Incorporated by reference to Form 10-Q filed on 11/12/2010).

10.8

Agreement for Services, dated October 20, 2010 (Incorporated by reference to Form 10-Q filed on 11/12/2010).

10.9

Consulting Agreement, dated October 25, 2010 (Incorporated by reference to Form 10-Q filed on 11/12/2010).

10.10

Operating Level Agreement, dated October 25, 2010 (Incorporated by reference to Form 10-Q filed on 11/12/2010).

10.11

Side Letter, dated March 21, 2011, by and among Iveda Solutions, Inc., a Nevada corporation , Sole-Vision Technologies, Inc. (doing business as MegaSys), a corporation organized under the laws of the Republic of China, and the shareholders of MegaSys (Incorporated by reference to Form 10-K filed on 3/30/2011).

Consulting Agreement between Iveda Solutions, Inc. and Amextel S.A. de C.V. dated November 2, 2011 (Incorporated by reference to Exhibit 10.14 to Form 10-K/A filed on 5/11/2012).

31.1*

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**

Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.1**

The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2014 and December 31, 2013, (ii) Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2014 and 2013, (iii) Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2014 and 2013, and (iv) the Notes to Condensed Consolidated Financial Statements (Unaudited).

* Filed herewith

** Furnished herewith

26

SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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